Sorrent Plc is an international group of companies with its head office located in Ireland. The company was founded in 2010 by Helena Ryan and Colman Kenny. The group designs a wide range of living spaces including garden rooms, workshops, bespoke home offices and pods. The owners have won several enterprise awards for their innovation and design. Sorrent is highly accredited within the industry and has a very strong brand. The group sells on the global market and its customer base is both commercial and domestic. Sorrent is listed on Euronext Dublin and applies International Reporting Standards (IFRS) for financial reporting purposes. Sorrent Plc is made up of three companies, the parent company and two subsidiaries: Brukendal and Tuttles. Brukendal is a German company who design and manufacture innovative workspaces while Tuttles, a UK company, sells bespoke garden rooms. Sorrent acquired an equity stake in Brukendal on 1 January 2017 while the Tuttle investment was made on 1 January 2020 (details of both acquisitions are laid out in outstanding issue 1 below). The decision to invest in Tuttles was not an easy one for Sorrent to make. There was significant disagreement amongst the directors prior to the acquisition of Tuttles. While some directors welcomed the opportunity to invest in a business renowned for its bespoke craftmanship, others felt that the continued uncertainty surrounding Brexit was just too much of a risk to take. In the end, a narrow majority voted in favour of the investment. You are an accountant with Sorrent Plc and work closely with the financial controller, Tom Pearson. You have recently qualified as a Certified Public Accountant and are quite pleased with yourself having recently passed your final exams. You were particularly pleased with your Advanced Financial Reporting result and feel you are now ready to take on any financial reporting issue. It is now 3 February 2021 and you are working from home. Tom Pearson has just emailed you with a list of outstanding matters relating to the 2020 accounts. But before you open his email, you join in on a Zoom meeting that is taking place between Sorrents CEO (Helena Ryan) and Euronext (Dublin) communications officer. It appears that there is growing unease about the groups poor record of sustainability reporting. This lack of reporting is causing disquiet amongst the stakeholder groups and is having a negative effect on the share price. (You had noticed that there was very little movement in the groups share price last year, although the financial performance of the company is good). You are quite shocked by this because you believe that Sorrent Plc exercises sustainable work practices. You believe that the lack of sustainability reporting arises from a wish to avoid what might be perceived to be vain publicity, rather than poor work practices. Tom Pearson has put a note into the chat room, proposing that the accounting team prepare a working paper on this. He has suggested that you add this task to your list of outstanding matters and report back to him by the end of the week. So, you log out of the meeting, make a fresh pot of coffee, and get to work. The list of outstanding issues are itemised below. The draft financial statements are included in Appendix 1. Page 3 of 10 OUTSTANDING ISSUES IN RESPECT OF THE SORRENT COMPANIES FINANCIAL STATEMENTS AT 31 DECEMBER 2020 Note: You may assume that the transactions below are net of taxation Outstanding Issue 1: Investments It is the policy of the Sorrent group to value non-controlling interests using the proportion of net assets method. Brukendal Sorrent acquired 80% of Brukendal on 1 January 2017 when Brukendals share capital was 2.5m and the retained earnings were 4.125m. At the date of acquisition, the fair value of Brukendals net assets were the same as their carrying value. The acquisition price was 10.25m and this was paid in cash on 1 January 2017. Tuttles Sorrent acquired a 70% equity stake in Tuttles, a UK company, on 1 January 2020 for 12.75m (15m). On the date of acquisition, the fair value of Tuttles net assets was the same as its carrying value. Tom Pearson noted in the acquisition file that Tuttles operates on an independent basis and is responsible for organising its own finance. In addition, most of Tuttles operations are conducted in the UK. Therefore, the functional currency of Tuttles is deemed to be pounds sterling. The workings for Tuttles for inclusion in the consolidated financial statements have been partially completed. The statement of financial position and the statement of profit and loss have already been converted into euros in accordance with IAS-21 The Effects of Changes in Foreign Exchange Rates and the converted statements (along-side the sterling amounts) are included in Appendix 1. The relevant exchange rates used to convert the financial statements include: Rate Exchange Rate 1 January 2020 0.85/ Average 2020 0.87/ 31 October 2020 0.875/ 31 December 2020 0.89/ Page 4 of 10 Outstanding Issue 2: Intangible Assets The accounting policy for intangible states that acquired intangible assets are measured initially at cost and are amortised on a straight-line basis over their estimated useful lives. A review of intangible assets held by Sorrent and its subsidiaries at 31 December 2020, has identified two outstanding matters for your attention. The first is that in April 2020, Brukendal was approached by a well-known multinational company, RGH Plc. RGH wished to purchase partitioning systems for their offices worldwide. A condition of purchase was that specified eco materials were to be used in the production process. The parties agreed that Brukendal would design and test the products. If the systems proved commercially viable, the multinational company would acquire a certain quantity at a date and price to be agreed later. RGH Plc would also re-imburse all of the research costs incurred by Brukendal. Brukendal commenced work on the project on 1 June 2020 and incurred substantial costs over a sixmonth period. In October 2020, a prototype was developed, and this was showcased, at a virtual engineering conference on 3 November 2020. Following some final modifications, the product was ready for sale. However, as at 31 December 2020, no sales contract had been agreed with RGH. An email from a purchasing manager, dated 28 January 2021 states that because of on-going COVID-19 restrictions, RGH are not in a position to proceed with the purchase but, they will be back in touch as soon as the restrictions ease. The costs incurred on the project, itemised below, have been capitalised in full in the financial statements on the basis that the partitioning systems were commercially viable and the costs are recoverable. Date Item 000s June 2020 Initial training costs 20 July September 2020 Other research costs 300 October 2020 Prototype development costs 100 November 2020 Legal and professional fees 7 December 2020 Promotional costs 8 TOTAL 435 The second outstanding matter relates to the groups brands. On the acquisition of Brukendal, the company brand was separately identified from other intangible assets and was valued at 1.1m. You have been asked to review this figure. You notice that it is unchanged from 2017, although the normal accounting policy for brands is to amortise them over a 12-year period. You also know that 500,000 has been spent each year maintaining the Brukendal brand but this expenditure has never been added to the carrying value. A note from Tom Pearson at the bottom of the file states that he never bothered to amortise this brand because it has a very strong identity and continues to hold its value. In fact, he adds we might consider changing the accounting policy of the entire group so that all intangible assets are treated as having an indefinite useful life. Let me know what you think.